The UK is set to mandate the foreign PE exemption. Whilst overseas profits will not be subject to UK tax, foreign losses will no longer be available to reduce UK tax liabilities.

Published: 09 June 2026
Authors: Laura Board

The UK Government has announced changes to the tax treatment of UK companies with foreign permanent establishments (PE).

For accounting periods beginning on or after 1 January 2027 (with the changes commencing from 1 September 2026 for oil and gas companies), the choice of whether a UK company can include the foreign PE’s profits and losses into its UK tax calculations will be removed. A mandatory exemption regime will apply resulting in: (i) the foreign PE’s profits no longer being subject to UK corporation tax; and (ii) the foreign PE’s losses no longer being available to reduce the company’s UK corporation tax liabilities.

The need for change

Under the current rules, without making an exemption election, UK companies are subject to UK corporation tax on the profits of its foreign PEs. The foreign PE’s losses are also available to be used to offset against UK profits.

In its Policy Paper, HM Revenue & Customs confirms the ability to offset foreign losses against UK tax is not balanced by equivalent foreign profits being taxed in the UK. This may arise because UK tax is reduced by double taxation relief or because profitable foreign PEs are subsequently incorporated and therefore removing profits from the charge to UK corporation tax (without generally triggering a taxable gain).

As a result, it is considered that the UK is effectively subsidising overseas losses without taxing the related foreign profits. The UK Government has confirmed that this change in approach is standard international practice to seek to protect against this outcome.

Next steps

Businesses should begin assessing the expected performance of their foreign PEs and reviewing their current structures now, ahead of 2027. Draft legislation is due to be published this Summer, which is expected to include both transitional rules and anti-avoidance rules aimed at artificially accelerating the utilisation of foreign PEs losses to minimise the impact of this change.

Please get in touch with our Tax & Incentives team to discuss how these changes may impact your business. They would be very happy to discuss your multinational tax arrangements with you.